Starting a business with a partner, friend, or family member is exciting. What is often overlooked in that excitement is the question of what happens when things go wrong — when partners disagree, when one wants to exit, or when the business faces difficult decisions. A partnership agreement answers all of these questions before they become disputes.
What Is a Partnership Agreement?
A partnership agreement is a legally binding document that sets out the rights, responsibilities, and arrangements between business partners. It governs how the business is run, how profits and losses are shared, and what happens in various situations — including if a partner wants to leave, becomes incapacitated, or passes away.
What Happens Without One?
Without a written partnership agreement, your partnership is governed by the Partnerships Act 1892 (NSW) — a set of default rules that may not reflect what you actually agreed with your partner. Under the default rules:
- All partners share profits and losses equally, regardless of capital contribution or workload
- All partners have equal say in management decisions
- Any partner can dissolve the partnership at any time by giving notice
- The partnership automatically dissolves on the death or bankruptcy of a partner
These defaults are often completely at odds with what partners actually intended. A written agreement overrides the default rules.
What Should a Partnership Agreement Cover?
- Capital contributions: How much each partner is putting in, and whether that affects profit sharing
- Profit and loss sharing: The ratio in which profits and losses are shared
- Decision-making: What decisions require unanimous agreement versus majority vote
- Management roles: Who is responsible for what aspects of the business
- Drawings and salaries: How and when partners can take money out
- Deadlock resolution: What happens when partners cannot agree
- Exit provisions: How a partner can leave, and how their share is valued and bought out
- Death or incapacity: What happens to a deceased or incapacitated partner's share
- Restraint of trade: Whether a departing partner can immediately start a competing business
- Dispute resolution: How disputes are to be resolved (mediation, arbitration)
What About a Company or Trust?
Many businesses operate through a company or trust rather than a formal partnership. In that case, a shareholders agreement (for companies) or a trust deed (for trusts) serves a similar purpose to a partnership agreement. Whatever structure you use, a written agreement between the principals is essential.
At James Papas Solicitors, we draft and review partnership agreements, shareholders agreements, and other business structuring documents for small and medium businesses across Western Sydney. Call us on (02) 9633 3122. Your first consultation is free.
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